Rent or buy? It’s an important decision, especially for young professionals who are launching their careers and beginning to shape their long-term financial plan. A July 2022 IPropertyManagement report found that more than 100 million Americans rent their homes and almost 35% of them are under 35, but that doesn’t mean they’re going the cheapest route. Millennials spend around $97,400 on rent when they hit their 30s.
That number could climb as rental prices rise nationwide, potentially pushing more young professionals into the home buying arena. U.S. apartment rental rates in 2022 have risen 77.1% in two years, and 23% of Millennials say it’s a motivating factor in their decision to buy, according to a survey conducted by Multifamily Executive.
But which one makes the most sense? Here’s what young professionals should consider.
Key points to remember
- Young professionals want to live the American dream and buy their own home.
- But, many young adults also have student loans, credit card debt, and low levels of savings.
- The financial cost-benefit of owning versus renting will depend on several factors – but always keep the long term in mind.
Start with cost considerations
Cost is an obvious factor in the decision to rent or buy. However, it is important to have a complete financial picture of how the two compare. “There is always a tipping point as to when the cost of buying will be more advantageous than renting, but certain factors play a role in what buyers will buy and when,” explains the agent. Gina Ko of the New York real estate group Triplemint.
Beyond a property purchase priceyoung professionals should also consider things like advance payment, closing costs, homeowners association or co-op fees, insurance, property taxes, utilities and maintenance. These costs can vary greatly depending on the type of property you wish to purchase.
Your choice of market also matters. In some cities, there can be a big difference between rental rates and a mortgage payment. San Francisco is a prime example. The median rent price in August 2022 was $3,750, according to Zillow. By comparison, Zillow says the median mortgage payment in the Bay Area is $5,700, a 37.4% increase from the previous year.
The down payment could be a deciding factor. Although it is possible to get a FHA loan with as little as 3.5% down payment, Ko says even that amount could be hard to save for someone in the early years of their career.
Interest rate are also a consideration, says Wes Woodruff, partner and senior mortgage originator at Residential Funding Consultants in Atlanta. Interest rates affect how much you’ll pay for a mortgage, but they can also cause rental rates to rise. You have no control over what a landlord will charge you, says Woodruff, and “it might be cheaper to buy today than to stay somewhere with constant rent increases.”
The Federal Reserve raised the federal funds rate four times by August 11, 2022, with additional rate hikes expected before the end of the year. Freddie Mac’s 30-year fixed mortgage rates increased the week of August 11, 2022 from 4.99% to 5.22%, which may not be an incentive for young professionals to get a higher rate on a mortgage right now.
Consider the long term
In addition to cost, young professionals should think about their career path when considering the move from leasing to buying. Ko says she often comes across young buyers who don’t know where they will be career-wise in three to five years. A common compromise is to buy a condominium that they can hire if their job takes them in another direction or to another city.
“Your career trajectory has a huge impact on your decision to rent or buy,” says Shane Lee, a corporate communications analyst for RealtyHop, and one of the biggest factors is how a career change might affect your earnings. “Owning a home requires a huge financial commitment, and if your income fluctuates over the next three to five years, it may not be ideal for you to buy.”
Woodruff says that if you know you’ll be staying at your current location for at least three years, the purchase may be worth it. But you have to look at the different what-if scenarios. This includes the possibility of being transferred, of having the start you work to go bankrupt or move to another company and take a pay cut.
Starting a family also comes into play. Lee says that if you’re single and have no immediate plans to start a family, buying might not be on your radar at all. . On the other hand, if you envision a spouse and children in the picture – or if you already have a family – owning a home can provide more security and stability.
When you’re driven by family considerations, renting rather than buying is more about finding the right neighborhood that offers quality schools, a safe environment, and a reasonable commute to work. That doesn’t mean having the space you need. “I think it’s really hard to have an apartment with kids,” Woodruff says. “Having a home with a backyard goes a long way in helping a family grow.”
Be ready to buy when the time is right
If you plan to rent a little longer before you buy, don’t waste that time. Use it to prepare yourself financially for home ownership.
“Your credit score is huge,” says Woodruff, and young professionals don’t always understand how credit works. Credit scores aren’t the only determining factor in mortgage decisions, but they are very important, and a higher score could mean a lower interest rate. If you’re new to credit, Woodruff recommends opening one to two credit cards and only charging what you can afford to pay in full each month. Most importantly, make your payments on time.
Evaluate your current salary against its growth potential to determine what kind of budget you’ll have to work with when you’re ready to buy. If you are facing a large debt, especially student loan debtLee recommends working on part repayment so you have more disposable income to pay for a house.
Finally, consider your down payment and closing costs. Saving a down payment of 20% or more allows you to avoid private mortgage insurance (PMI), although it is possible to buy a house with less money. Closing costs can add another 2-5% to the total amount of money you’ll need to buy.
Understanding exactly how much home you can afford and what type of mortgage is best can help you determine how much you need to save for your down payment and closing costs. Running numbers through a mortgage calculator can give you an idea of how your estimated purchase costs compare to your actual rental costs.
Both leasing and buying have their pros and cons for young professionals. Renting allows you to avoid some costs, such as repairs and improvements, property taxes and home insurance, but depending on where you live, owning a home may be the most affordable option. Weighing both sides of the equation, along with financial considerations, can help you determine which makes more sense. Most importantly, keep your ultimate goal in perspective.
“Decide what your priorities and goals are [are]“, says Ko, “and work backwards to make sure you can reach and reach them. ”